Feature – Private markets
diversified alternative strategies LTAF combining multiple pri- vate market asset classes, such as infrastructure, private credit, private equity and real estate. Duncan Hale, of private markets group Schroders Greencoat, which runs the asset manager’s second LTAF focused on renewable energy and energy transi- tion aligned infrastructure investments, says a more amenable regulatory environment for illiquid assets in DC has been a long time coming. “For too long DC pension scheme members have had their noses pressed up against the glass, looking in at other types of investors enjoying the benefits that come from investing in illiquid assets. [LTAFs] could only be possible due to the regula- tory progress made through the LTAF regime,” Hale says. The appetite for illiquids, at least from master trusts, is evi- denced by Cushon’s 15% allocation to private markets which is on offer through its sustainable investment strategy at a fund management charge of 0.15%. Meanwhile, the £30bn National Employment Savings Trust (Nest) invests £5bn of DC savers’ money in property, private credit, unlisted infrastructure and private equity, while Smart Pension has invested in illiquid assets since 2021. Jesal Mistry, senior DC investment director at Legal & General Investment Management (LGIM), which only includes private market assets such as short-dated private credit in its default strategy for those who are closer to retirement, plans to extend illiquid investments to all members of its master trust. “The natural next step is to broaden this out to the wider uni- verse of private market opportunities throughout the entire journey within DC strategies, using the scale of the master trust structure to enable this,” Mistry says. “It is critical that we continue to do everything we can to provide our members with the best possible outcomes. We believe private markets will play an increasingly central role in DC investment portfo- lios at all stages of the member journey, including in the L&G Master Trust.”
Value over cost However, wholesale moves by master trusts into illiquid assets is still hampered by a persistent focus on keeping costs low for auto-enrolled (AE) members. The Pensions and Lifetime Saving Association (PLSA) describes the AE market as “relatively immature and highly competitive. It has consolidated rapidly and continues to do so. In a fierce market small points of price difference make a sig- nificant impact”.
This is particularly true in the master trust sector, where some providers still use fee differentiation – rather than focusing on value – to capture market share. Mistry says: “In the past, the focus was all about driving down cost for schemes, which is an important consideration but did
48 | portfolio institutional | July-August 2023 | Issue 125
It is fair to say that illiquids require greater hands-on governance from a board of trustees.
Jesal Mistry, Legal & General Investment Management
limit innovation in the DC market – this led to an emphasis on low-cost index funds in DC investment strategies.” Mistry adds that there has “been a real shift in terms of the reg- ulatory agenda” noting that the government’s Value for Money consultation which closed in March, was “all about focusing more holistically on how we define value through net of fee performance”. “This shift will also need to happen across the market, and it is vital that value is judged more holistically to allow for any meaningful allocation to illiquids in DC strategies,” he says. Callum Stewart, head of DC investment at Hymans Robertson, calls on master trusts to re-evaluate their ability to include illiq- uid assets now, or risk regretting it later. “Fast forward a decade. Would you be more comfortable hav- ing a conversation with a member about how their pension savings have been invested at low cost, or that you have deliv- ered a superior net return regardless of the cost required to get there?” he says.
Significant hurdles
Looking further across the DC landscape, particularly to smaller schemes, the challenges of including illiquid assets becomes more acute.
What some in the industry call an “obsession” with daily pric- ing, which allows investors to transfer in and out of funds at will using up-to-date valuations for those assets, has turned them off illiquid assets. But the Institute and Faculty of Actuaries says: “The vast majority of DC investors do not require daily trading, staying invested for the long term with very limited trading activity throughout their membership.” Meanwhile new contributions coming into the scheme enable them to buy-out the units of older members.
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